Canadian Dollar Predictions
You have come to the right place if you’re thinking of trading the Canadian Dollar on the foreign exchange market. Because of the loon bird that draws attention to the $1 Canadian coin, the Canadian Dollar is often referred to as ‘The Loonie.’ The CAD is the world’s seventh most regularly traded currency. It can be indicated with either a traditional ‘$’ symbol or ‘C$’ to distinguish it from other Dollar-based currencies.
The Canadian currency rose to 1.23 against the US dollar, recovering from its lowest level in over four and a half months after the Federal Reserve hiked interest rates by 50 basis points. Due to a phased EU ban on Russian oil imports, oil prices also rose. Furthermore, the Bank of Canada has raised its overnight rate target by 125 basis points to 1% this year. It has signalled further hikes as the economy enters excess demand and inflation remains well above the target.
In March, Canada’s annual inflation rate increased quicker than projected, reaching a 31-year high of 6.7 percent. The most recent manufacturing PMI also showed healthy operational conditions and prolonged the current growth phase to 22 months. It did, however, fall to a 14-month low. This week, investors will be looking for the Canadian jobs report, which is expected to indicate that the workforce expanded for the third month in a row but by the least amount since last October.
In recent months, inflationary pressures have emerged on both sides of the border. So far, central banks have dismissed inflation as a fad and not a reason to reduce support sooner than projected. However, inflation estimates have frequently surprised on the upside and have shown to be more persistent than some predicted. Moreover, US inflation will inevitably be imported into the country because of Canada’s open economy. In general, a higher inflationary environment means a weaker Canadian dollar.
Covid has proven to be more persistent and lethal than anyone could have predicted. The progress of vaccination efforts around the world and the dissemination of Covid variations among vaccinated and unvaccinated populations will have a significant impact on economic activity. The greater the potency of the varieties and the more the risk they pose to economic activity, the greater the appetite for risk havens such as the US dollar. Hence, the lower the Canadian Dollar.
Early in the pandemic, there was discussion about whether the recovery would be V-shaped or U-shaped. That question has now been answered. Almost every indicator of economic activity is approaching or has already surpassed pre-pandemic levels. Indeed, we have outperformed the most optimistic economic recovery projections. For several months, the “reflation trade” has been a significant trend in financial markets. What remains to be seen is whether the recent acceleration in economic activity will continue or if we are in for a lengthy struggle to the finish line of recovery. The stronger the economic rebound, the stronger the Canadian Dollar.
Experts at CIBC Capital Markets believe the Canadian Dollar will be better supported in the medium term due to Canada’s solid trade dynamics. In contrast, analysts at UBS believe the currency will stage a comeback as the market prices are in a frenzied pace of Federal Reserve rate hikes. The Bank of Canada, on the other hand, is projected to continue tightening monetary policy, with markets forecasting up to 200 basis point hikes over the rest of 2022. This could lend support to the Canadian Dollar via the interest rates channel.
The Bank of Canada raised its cash rate from 0.5 percent to 1 percent last month, momentarily outpacing the Federal Reserve and helping to limit the extent to which recent increases in US government bond yields can weigh on the Canadian Dollar. This and the Fed’s recent more hawkish policy stance come as both central banks aim to guarantee that current excessive inflation rates do not become entrenched at their current levels, which are three or more times higher than either central bank’s legislated targets.